Monday, 23 November 2015

China – Just How Bad?

Baltic Dry Index. 498 -06        Brent Crude 44.05

LIR Gold Target in 2019: $30,000.  Revised due to QE programs.

“Call it the Goldman Sachs test. If this is something Goldman would do to its clients, don't do it."

Felix Salmon.

Just  how bad is bad in China? We open with a review of China that suggests bad is so bad that we are still under appreciating what is going on in China.  Not to worry though, Goldman’s turned bullish on emerging markets for next year. 2015 was so bad that 2016 ought to be something of a dead cat bounce.

Well maybe, Baron Rothschild is said to have remarked “buy when there’s blood in the streets, even if the blood is your own,” but Goldie famously forecast $250 oil when crude reached $140 and topped out. While last week suggested oil is now headed for $20. They also famously put together collateralised mortgage securities which they shorted while selling them on to their unsuspecting Muppets. I’ll pass on trying to catch a falling sword.

Ilargi: The Great Fall Of China Started At Least 4 Years Ago

Looking through a bunch of numbers and graphs dealing with China recently, it occurred to us that perhaps we, and most others with us, may need to recalibrate our focus on what to emphasize amongst everything we read and hear, if we’re looking to interpret what’s happening in and with the country’s economy.
It was only fair -perhaps even inevitable- that oil would be the first major commodity to dive off a cliff, because oil drives the entire global economy, both as a source of fuel -energy- and as raw material. Oil makes the world go round.
But still, the price of oil was merely a lagging indicator of underlying trends and events. Oil prices didn‘t start their plunge until sometime in 2014. On June 19, 2014, Brent was $115. Less than seven months later, on January 9, it was $50.
Severe as that was, China’s troubles started much earlier. Which lends credence to the idea that it was those troubles that brought down the price of oil in the first place, and people were slow to catch up. And it’s only now other commodities are plummeting that they, albeit very reluctantly, start to see a shimmer of ‘the light’.
----About which Bloomberg had this to say:
China’s consumer inflation waned in October while factory-gate deflation extended a record streak of negative readings [..] The producer-price index fell 5.9%, its 44th straight monthly decline. [..] 
Overseas shipments dropped 6.9% in October in dollar terms while weaker demand for coal, iron and other commodities from declining heavy industries helped push imports down 18.8%, leaving a record trade surplus of $61.6 billion.

44 months is a long time. And March 2012 is a long time ago. Oil was about at its highest since right before the 2008 crisis took the bottom out. And if you look closer, you can see that producer prices started ‘losing it’ even earlier, around July 2011.

Something was happening there that should have warranted more scrutiny. That it didn’t might have a lot to do with this:
China’s debt-to-GDP ratio has risen by nearly 50% in the past four years.

The producer price index seems to indicate that trouble started over 4 years ago. China dug itself way deeper into debt since then. It already did that before as well (especially since 2008), but the additional debt apparently couldn’t be made productive anymore. And that’s an understatement.

World commodities markets, like the entire global economy, were propped up by China overinvestment ever since 2008. Commodities have been falling since early 2011, after rising some 60% in the wake of the crisis. And after the 2011 peak, they’ve dropped all the way down to levels not seen since 1999. And they keep on falling: steel, zinc, copper, aluminum, you name it, they’re all setting new lows almost at a daily basis.
Moreover, if we look at how fast China imports are falling, and we realize how much of those imports involve (raw material) commodities, we can’t escape the conclusion that here we’re looking at not a lagging, but a predictive indicator. What China doesn’t purchase in raw materials today, it can’t churn out as finished products tomorrow.
Not as exports, and not as products to be used domestically. Neither spell good news for the Chinese economy; indeed, the rot seems to come from both sides, inside and out. And no matter how much Beijing points to the ‘service’ economy it claims to be switching towards, with all the debt that is now deflating, and the plummeting marginal productivity of new debt, most of it looks like wishful thinking.
And that is not the whole story either. Closely linked to the sinking marginal productivity, there is overleveraged overcapacity and oversupply. It’s like the proverbial huge ocean liner that’s hard to turn around.
----And new car plants too:
For much of the past decade, China’s auto industry seemed to be a perpetual growth machine. Annual vehicle sales on the mainland surged to 23 million units in 2014 from about 5 million in 2004. [..] No more. Automakers in China have gone from adding extra factory shifts six years ago to running some plants at half-pace today—even as they continue to spend billions of dollars to bring online even more plants that were started during the good times.

The construction spree has added about 17 million units of annual production capacity since 2009, compared with an increase of 10.6 million units in annual sales [..] New Chinese factories are forecast to add a further 10% in capacity in 2016—despite projections that sales will continue to be challenged. [..] “The players tend to build more capacity in hopes of maintaining, or hopefully, gain market share. Overcapacity is here to stay.”

Emerging Markets Retreat From Abyss as Goldman Turns Bullish

November 22, 2015 — 7:45 PM GMT Updated on November 23, 2015 — 4:32 AM GMT
Finally, there may be some relief for emerging-market investors.

Strategists at banks from Goldman Sachs Group Inc. to Bank of America Corp. say that developing-nation assets are bottoming out following three years of losses in currencies and stocks.

It’s not that they are likely to embark on a rally. Rather, that the mood among investors has become so depressed, even a marginal improvement in the economic outlook will be enough to shift sentiment and drive up assets such as the Mexican peso, Russian ruble bonds and Indian stocks, the analysts say.

’‘We are a little bit more optimistic next year,” said Geoffrey Dennis, head of global emerging-market strategy at UBS Securities LLC in Boston, who favors Chinese, Indian and Russian equities. “You get a slightly better earnings story and overall a slight pickup in economic growth in emerging markets next year. This year’s been so dreadful.”

After five years in retreat, developing countries from Mexico and Poland are showing signs of recovery as the U.S. and European economies pick up. While the almost 30 percent decline in emerging-market currencies since 2012 saddled investors with losses, it also helped some nations such as Brazil, Turkey and India to tackle their economic vulnerabilities, narrowing current-account deficits and boosting competitivity.

Developing markets look inexpensive by historical standards. The MSCI Emerging Markets Index has declined 30 percent since its 2011 high and now trades at about 12 times estimated earnings, or almost one-third less than the valuation of the Standard & Poor’s 500 Index, the benchmark for U.S. stocks. The developing-nation gauge was little changed at 12:31 p.m. in Hong Kong.

On average, emerging-market currencies are 16 percent below their fair values against the dollar as the Brazilian real and the Turkish lira declined to record lows this year, according to Bank of America’s model.

Even though prices will remain volatile as the Federal Reserve prepares to raise interest rates for the first time in almost a decade, Bank of America’s strategists say they are “constructive” on emerging-market currencies in the “medium term.”

Meanwhile Wells Fargo senses it might be time to move back into Russia. Are sanctions about to be lifted?

Wells Fargo Reconsiders Russia as Putin Steps Up Terror Response

November 22, 2015 — 7:00 PM GMT Updated on November 23, 2015 — 4:20 AM GMT
President Vladimir Putin’s move toward a more robust alliance against terrorism with the U.S. and Europe has Wells Fargo & Co.’s Brian Jacobsen considering a strategic shift of his own -- into Russian stocks.

Jacobsen, the chief portfolio strategist who helps manage $242 billion at Wells Fargo Advantage Funds, has stayed clear of Russia since 2014 amid a standoff with its former Cold War foes over the Ukraine conflict. 
Now he’s thinking about adopting a “mild overweight” standpoint as their foreign policies align in the fight against Islamic State.

“This could be a turning point in the relationship between Russia and the West,” Jacobsen said by phone last week. “We need some time to see how things unravel, but the timing might be right. The conflict in Ukraine abated, a decline in oil stabilized, we might see sanctions being lifted. So if you combine all these factors, we could see a good valuation opportunity.”

"Finance is the art of passing customer segregated funds from hypothecation to hypothecation until it finally disappears."

Jon Corzine, with apologies to Robert  Sarnoff

At the Comex silver depositories Friday final figures were: Registered 43.55 Moz, Eligible 116.73 Moz, Total 160.28 Moz. 

Crooks and Scoundrels Corner

The bent, the seriously bent, and the totally doubled over.
Today more disturbing news from China. Has China gone from boom to bust?

China busts $64 billion underground banking ring


Chinese officials have busted the country's largest-ever underground banking ring, involving transactions totaling $64 billion.

Some 100 suspects from eight gangs have been detained since police in eastern China launched the investigation last September, according to official state media.

The gangs were thought to be linked to a ringleader who allegedly operated multiple shell companies in Hong Kong engaged in money laundering and foreign exchange transactions.

China has strict capital controls -- citizens can only move around $50,000 out of the country each year.

The restrictions have given rise to a shadowy world of money laundering -- via unique means from fine art buys to casinos in southern China -- that helps people send funds abroad. While some of that money comes from honest earnings, a portion is believed to have been obtained via corruption or fraud.

Over the past year, officials have issued arrest warrants for 56 people, frozen 3,000 bank accounts, shut down 37 unlicensed financial institutions allegedly laundering money and reviewed over 1.3 million suspicious transactions, reported state media.

Police busted another 10 unapproved banks this week, allegedly linked to about 51.6 billion yuan ($8.1 billion) in illegal transactions.
“There are some bored foreigners, with full stomachs, who have nothing better to do than point fingers at us [China]. First, China doesn’t export revolution; second, China doesn’t export hunger and poverty; third, China doesn’t come and cause you headaches, what more is there to be said?”

President Xi Jinping

Solar  & Related Update.

With events happening fast in the development of solar power and graphene, I’ve added this new section. Updates as they get reported. Is converting sunlight to usable cheap AC or DC energy mankind’s future from the 21st century onwards? DC? A quantum computer next? 

Today, the BBC gets on message hyping up next week’s “climate change” conference in Paris. Stand by for a media blitz of propaganda and disinformation led from the front by the BBC.

Moroccan solar plant to bring energy to a million people

November 23 2015
A giant plant using energy from the Sun to power a Moroccan city at night will open next month.
The solar thermal plant at Ouarzazate will harness the Sun's warmth to melt salt, which will hold its heat to generate energy in the evening.

The first phase will generate for three hours after dark; the last stage aims to supply power 20 hours a day.
It is part of Morocco's pledge to get 42% of its electricity from renewables by 2020.

The UN has praised Morocco for the level of its ambition. The UK, a much richer country, is aiming for 30% by the same date.

The Saudi-built Ouarzazate solar thermal plant will be one of the world's biggest when it is complete. The mirrors will cover the same area as the country's capital, Rabat.

Paddy Padmanathan of Saudi-owned ACWA Power, which is running the thermal project, said: "Whether you are an engineer or not, any passer-by is simply stunned by it.

"You have 35 soccer fields of huge parabolic mirrors pointed to the sky which are moveable so they will track the Sun throughout the day."

The developers say phase one of the futuristic complex will bring energy to a million people.

The complex stands on the edge of a gritty, flat, rust-red desert, with the snow-clad Atlas mountains towering to the North.

It is part of a vision from Morocco's King Mohammed VI to turn his country into a renewable energy powerhouse.

The country has been 98% dependent on imported fossil fuels, but the king was persuaded of the vast capacity of Atlantic wind, mountain hydro power and scorching Saharan sun.

The king's plans are being enacted by environment minister Hakima el Haite.

She told me: "We are convinced that climate change is an opportunity for our country."

As part of its national commitment to the Paris climate conference, Morocco has pledged to decrease CO2 emissions 32% below business-as-usual by 2030, conditional on aid to reach the renewables target.

Currently Morocco imports electricity from Spain, but engineers hope that will not last long.
Paddy Padmanathan predicted: "If Morocco is able to generate electricity at seven, eight cents per kilowatt - very possible - it will have thousands of megawatts excess.

The monthly Coppock Indicators finished October

DJIA: +31 Down. NASDAQ: +125 Down. SP500: +53 Down. 

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